文献资料-consultation_paper_enhancing_equity_settlement_system.doc

Australian Securities Exchange Enhancing Australias Equity Settlement SystemEnhancing Australias Equity Settlement SystemConsultation Paper & Request for CommentRequest for Comment: logisticsASX would value your input on these important issues. Your responses should be provided in the designated areas of each part of the document (see further instructions below). Please complete the following contact details prior to submitting your updated version of this document to ASX:Clearing/Settlement Participant(s): - If you are responding on behalf of more than one, please list all ASX participants.- If you are not a Clearing/Settlement Participant, please state your companys name and function.Contact Name:Position Title:Phone Number:Email:How to use this document to provide your responseYou should be running Microsoft Word 2000 (or a later version) to use this document. Please type your response to each question in the box provided below it. Microsoft Word will create extra lines for you if the space provided is not sufficient.Once you are satisfied with your response, please save the document and attach it in an email to:Paul JonesGeneral Manager, Clearing Risk PolicyASX LtdLevel 5, 20 Bridge StreetSydney NSW 2000Telephone:+61 2 9227 0561E-mail:.au Due date for submissionsSubmissions in response to the Market Consultation Paper should be received no later than Friday 20 February 2009. A. IntroductionOverviewSecure and efficient equity settlement is essential to the operation of the Australian equity markets. The Australian Securities Exchange (ASX), through its subsidiary the ASX Settlement and Transfer Corporation (ASTC), is responsible for the provision of these services to the market. In so doing, ASTC holds a Clearing and Settlement facility licence and must comply with the licences obligations which include the Reserve Banks Financial Stability Standard for Securities Settlement Facilities. This mandates ASTC to conduct its affairs in a prudent manner.contributing to the overall stability of the Australian financial system. Since the introduction of CHESS in 1994, settlements of ASX-listed securities have risen significantly in number, value and the variety of transaction type. ASTC operates a highly efficient settlement approach utilising the daily CHESS batch to net the overwhelming majority of off- and on-market transactions to a single DvP Delivery versus Payment. payment per Settlement Participant. However, market events in early 2008 have emphasised that this single batch approach which is very efficient under normal operational conditions may give rise to complexities should a Settlement Participant fail to meet a payment deadline.The Reserve Bank of Australia (RBA) published a review of market events earlier this year and, in consultation with ASX, provided some suggestions for further analysis aimed at improving the current system, some of which have already been implemented. Following preliminary discussions with ASX and a representative sample of market users, RBA and ASX have undertaken a series of discussions around these and other alternatives.This document solicits market feedback on the need, impact and preferences of several potential means of attempting to further enhance the Australian equity settlement system. These enhancements are split into two broad categories modifications to the current CHESS batch process and more extensive changes to the overall settlement system. In addition to these settlement related issues, this document also seeks feedback on a proposed change to the central counterpartys account structures in the equity cash market. ASX continues to examine alternative means to develop and widen its clearing and settlement service and will consult with the marketplace on these additional matters in due course.The changes raised for discussion in this document are important and have a potentially significant impact on your business. Your feedback is appreciated and will assist ASX to determine the best way forward.Feedback SoughtASX is keen to obtain feedback from all market users and service providers on the various alternatives provided in this paper. Although typically high level, the document is extensive given the number and, in some cases, complexity of the alternatives canvassed. Given the length of the document and the timing of the circulation, the deadline for ASX to receive formal responses is not until 20th February 2009. ASX staff will be available to assist with any queries or clarification required to assist readers in preparing responses. On receipt of your feedback, ASX aims to follow up a representative cross-section of the replies before issuing a consolidated, anonymous summary of the feedback. Should ASX decide to pursue any of the alternatives outlined in this document, further consultation on the detailed implementation approach may be necessary.In responding to this document, ASX is keen for recipients to answer all questions. In particular, where you may disagree with the need and/or rationale for a change, it is important that ASX understands the operational impact should that change be implemented. Recipients are encouraged to consider combinations of the proposed alternatives where possible and to bear in mind the future changes to CHESS See “Consultation with Clearing Participants Regarding the Impact of a Multi-Market Operator Access Regime on Participants”(.au/about/pdf/asx_consultation_paper_access_to_ccp_and_chess_1.pdf and /intradoc-cgi/groups/participant_services/documents/communications/asx_020805.pdf) for consultation on this topic. which may emanate from any evolution to a multiple trading platform environment.Your attention is also drawn to another ASX consultation being run in parallel to this document. The focus of the other document is the harmonisation and linking of ASXs two central counterparties ACH and SFECC. Indeed, one of the consultation topics overlaps the two consultation processes. Further details may be found in “Delivering Efficiencies to the Marketplace through the Harmonisation and Linking of CCP Activities” on .au.Any questions on this consultation process or queries regarding its context should be addressed to Paul Jones at .au or Tim Hogben at .au.Index SectionTitle PageAIntroduction3Executive summary and outline of the purpose of this document.BBackground5Overview and additional reading on settlement system best practice,the history of CHESS and its current operational characteristics.CDrivers for Change to the Settlement Process10Outlines the recent historical context for the paper and the broad underlying approach to the range of alternatives.DChanges Implemented or in Progress12Recent changes to CHESS and those currently being implementedEProposed Modifications14Intended modifications designed to prevent and mitigate against potentialproblems arising from a failure to pay in the CHESS settlement batch.FOther Potential Changes16Proposes for discussion several more extensive changes to the currentapproach, seeking input on both the rationale and the operational impact.GAlternatives not to be Pursued Further19Options on which ASX is not convinced of the merit in pursuing at this time.HACH Account Structures20Unlike the preceding sections, this proposal to segregate novated businessbetween house and client accounts is driven by central counterparty issues.AppendixRequest for Comment22All questions related to the Sections are outlined in the AppendixB. BackgroundThis section is divided into three parts to provide important context for the following proposals and consultation questions. Settlement Methodologies CHESS History Current ArrangementsFurther suggested reading is also provided.Settlement MethodologiesAll settlement facilities aim to ensure that the market users have a high degree of certainty that settlement will be made on a timely basis and that the settlement system is fair, efficient, operationally reliable and cost-effective. It is also important that such systems minimise the potential for systemic risk.The preferred approach to settling market transactions varies, mainly in line with the characteristics of the instruments undergoing delivery and the payment mechanisms available to the settlement facility. Settlement models are divided into three major types, as outlined in this key document from the Bank for International Settlements - /publ/cpss06.htm. In practice however, settlement systems now have more variety than these three models, with many countries systems evolving into hybrids of these models by attempting to extract the benefits of each approach in a single system.Model 1:Systems that settle transfer instructions for both securities and funds on a trade-by-trade (gross) basis, with final (unconditional) transfer of securities from the seller to buyer (delivery) occurring at the same time as final transfer of funds from the buyer to the seller (payment).Model 2: Systems settling securities transfer instructions on a gross basis, with final transfer of securities from the seller to the buyer occurring throughout the processing cycle, but settle funds transfer on a net basis, with final transfer of funds from the buyer to the seller occurring at the end of the processing cycle.Model 3: Systems that settle transfer instructions for both securities and funds on a net basis, with final transfers of both securities and funds occurring at the end of the processing cycle.The rationale for choosing the optimal settlement methodology highlights two important properties: a systems netting efficiency and the level of inter-dependence between the settlement transactions. Typically low value, non-time critical, high volume transactions are best settled using a deferred net system such as the Model 3 CHESS settlement batch for equities which, for ASX trades, typically settle on a T+3 basis. These systems provide a high degree of netting efficiency - especially important where there is a high degree of inter-dependence between the transactions being netted and settled. However, in fixed income markets for example, where transactions are usually high value, more highly time-critical and have a lower volume of transactions, a real time gross settlement approach is deemed more appropriate, such as ASXs Austraclear service, as highlighted in diagram 1 below. Diagram 1 Settlement MethodologiesTransactionValuesUrgencyDeferred Net System(DNS)- Typically for Equities & retail transactionsReal-time Gross Settlement(RTGS)- Typically for fixed income transactionsModel 3Model 1Transactions in these Model 1 systems are settled on a trade-bytrade Where a central counterparty is utilising the settlement facility, it is common to net all trades with the CCP on a given stock scheduled for settlement on the same day into a single line. basis and are most suitable where there is a low degree of inter-dependence between each transaction. In practice, many operators of Model 1 systems have adapted their systems to include netting algorithms to assist transaction flow throughout the day. This is most prevalent where the nature of the transactions falls between the two extremes highlighted in the diagram, particularly where the facility settles transactions with a variety of volume and inter-dependency characteristics. History of CHESSFor a long period it was recognised that inefficiencies in Australias paper based settlement system must be addressed. The need for establishing a more efficient settlement system was highlighted during the 1986/1987 “bull” market. Settlement backlogs, caused by a failure to deliver promptly, stemmed the free flow of funds between industry participants and between them and their clients, as well as raising concerns about counterparty risk.The impetus for reforms to overcome these problems and to restore faith in the Australian equity market was boosted through recommendations from the “Group of Thirty (G30)” for upgrading settlement systems in securities markets world wide. This international organisation identified the risks in securities settlements and subsequently promulgated a set of global standards and goals for the industry, to alleviate those risks.In order to achieve compliance with the G30 recommendations the CHESS system proposal was adopted, as part of a three-stage strategy for upgrading Australias settlement facilities. The first stage (1989) was the introduction of the Flexible Accelerated Security Transfer System (FAST), which enabled eligible securities to be held in uncertificated form, at the discretion of the holder. Then, in 1992 the second stage introduced a shorter period (T+5) fixed settlement discipline for market transactions. The third and final stage was the development and implementation of CHESS (Clearing House Electronic Subregister System CHESS is owned and operated by the ASX Settlement & Transfer Corporation Pty Ltd (ASTC), a wholly owned subsidiary of ASX Limited, a publicly listed company.).CHESS provided a centralised electronic subregister for holdings of CHESS approved securities (1994). Holdings on this subregister are recognised in law as if they were maintained directly by the issuer. The electronic register facilitated settlement of market transactions between settlement participants of a delivery versus payment (DvP BIS Model 3 simultaneous settlement of net securities/net funds.) basis (1996). In February 1999, the T+3 fixed settlement regime was introduced. In addition, by this time all Australian domiciled listed entities were operating fully uncertificated registers. This completed the implementation of the G30 recommendations.ASTC continued to align CHESS to support the business requirements of the domestic market and also global standards of best practice by implementing Electronic Trade Confirmation (ETC) (1997), an RTGS service (2000) and a DvP service to support primary market activity. Since its introduction CHESS has achieved a high level of core operational performance and system availability, while continuing to reduce settlement batch timeframes, in periods of significant growth and volatility in cash equity market volumes and value (see diagrams 2a and 2b below). It has done so while maintaining low settlement failure rates; these are currently below 1% which, as the RBA has noted, is amongst the lowest failure rates in the world.Diagram 2a Scheduled Settlement (pre-netting)Diagram 2b Actual Settlement (post-netting) Overview of Current Settlement ArrangementsCHESS facilitates Delivery-versus-Payment (DvP) settlement for its Settlement Participants of a range of “CHESS eligible securities”. Currently there are around 7,460 CHESS eligible securities and about 100 ASTC Settlement Participants, including banking subsidiaries, brokers and custodians. Of these, 59 are Clearing Participants and are therefore able to enter into direct contractual obligations with the Australian Clearing House (ACH), ASXs central counterparty for the equity cash and options markets.Transaction TypesCHESS allows Settlement Participants to settle a variety of transactions, mainly comprising: Sales and purchases of securities; Transfer of securities to and from another trustee/custodian; Stock lending/borrowing; Margin loan re-financing; and, Capital raisings, including:o Placements;o Institutional entitlement offers;o Book-builds;o Broker firm offers; and,o Sub-underwriting shortfalls.All trades undertaken on ASXs ITS platform are novated to ACH, the central counterparty for ASXs equity cash market, giving rise to agreements between the Clearing Participants on each side of the transaction and ACH, to settle the transaction in CHESS on a net basis, typically three business days after the trade date (T+3). In order to facilitate these settlements, other bi-lateral movements of stock/cash are often required within CHESS. These related transactions are not novated to ACH and therefore are not supported by ACH and are therefore deemed to be non-novated. Around 18% of the values of all CHESS settlements are novated transactions, while non-novated transactions supporting novated settlements constitute approximately 80% of daily settlement value. Each CHESS settlement instruction is applied a Transaction Basis by the Settlement Participant in order to identify the reason for a movement in securities. The most commonly used transaction basis types support pre-settlement activity and are attributed to the sale or purchase of stock through a market participant by a non-market participant or the facilitation of a stock borrowing arrangement. Other forms of non-settlement related transactional activity are identified through a transaction basis include margin loan refinancing, transfers of ETF portfolios and capital raisings: M = Market O = Off-Market F = Facility for Non Reportable Transactions I = IPO Transaction (Primary Market Facility)Settlement Participants use the Transaction Basis field on settlement instructions to designate whether the movement of financial products is directly related to a market/reportable transaction (i.e. on/off market), supporting prim